Labour market flexibility and employment adjustment: micro evidence from UK establishments

This paper will study how firms react to demand shocks, examining how different aspects of flexibility shape their responses. The main findings are: very few firms choose to adjust price in response to a demand shock; firms with more flexibility are more likely to respond to demand shocks by adjusting employment and hours. The results provide a microeconomic explanation for recent macroeconomic evidence that labour input has become more closely aligned to the business cycle.